FM defers GAAR by a year, markets cheer clarity

The Sensex and the rupee recovered today after the Finance Minister Pranab Mukherjee announced that the General-Anti Avoidance rules have been deferred for a year.

PTI

The finance minister said proposed retrospective amendment of income tax laws will not override tax break treaties."Retrospective amendments to Income-tax Act not to override DTAAs with 82 countries" said Mukherjee in the Lok Sabha today.

He added that the government has set up a special committee to give recommendations for formulating rules and guidelines so that provisions will not be provided indiscriminately to all. The committee will submit its recommendations by 31 May 2012. He also said that the government is going to introduce an independent member to the GAAR panel.

This may spell good news for market investors as most of them were hoping for a one-year delay for more clarity in guidelines and implementation.

Moreover, the Finance bill removes the onus of proof from the tax payer to the tax department. . As a result the rupee has pulled back to 53 from the mornings high of 53.70 on hopes that FIIs will not withdraw their investments from the market.

He said that the Government has withdrawn the levy on all precious metals, branded or unbranded On branded jewellery, Mukherjee said there will be no excise duty on purchase of jewellery valued at Rs 5 lakh against earlier threshold of Rs 2 lakh. He also removed the levy of 0.3% excise duty on unbranded jewellery.

The earlier proposal was for an April 2012 rollout for GAAR. However, the Standing Committee has recommended that the GAAR be implemented, along with the Direct Tax Code (DTC), in April 2013.

The finance minister also announced the withdrawal of TDS on immovable property as proposed in the Budget. Moving the Finance Bill, 2012 for consideration and passage in the Lok Sabha, Mukherjee halved the capital gains tax for private equity investors to 10 per cent and relaxed the norms for arrest of persons involved in violation of Customs Act.

Mukherjee further announced a 0.2 percent securities transaction tax on deals involving unlisted companies instead of a withholding tax. The imposition of a withholding tax hurt private equity or venture capital companies that are looking to exit their early stage investments in private firms.

The value of international investors' holdings in the Indian market has already eroded by $9 billion in the past month when the rupee slid 4 percent against the US dollar, an Economic Times article pointed out earlier. Had GAAR been implemented in the current year Indian markets could have lost close to $ 10 billion.

Mukherjee's comments are sure to provide short-term relief to the markets, which have already begun cheering the clarity on the provisions and deferment of the implementation date. Moreover, a lot of fund flows had begun to dry up because of this confusion over GAAR and clarity on the issue is likely to renew investor faith in the markets.

"At a time when our current account deficit is so high we can't scare away foreign capital. Now that GAAR is deferred, India will stop underperforming global peers at least," Sandip Sabhawal, CEO, Portfolio Management, Prabhudas Liladher, told Reuters.

However even though the sentiment has improved,one has to wait and watch till the finance bill is cleared in Parliament after two days.